EXCLUSIVE – Goldman Sachs says it plans a confident, resolute approach to fighting Friday's SEC fraud suit. The 140-year-old firm’s executives believe they are "a prop in a campaign" for Wall Street reform, and say they plan to continue expressing confidence "after a sucker punch" by focusing on clients, who they believe are largely sympathetic.

Here are highlights of a voicemail left for employees by Chairman and CEO Lloyd C. Blankfein: “This is Lloyd on Sunday in New York. ... The extensive media coverage on the SEC’s complaint is certainly uncomfortable, but given the anger directed at financial services, not completely surprising. … Goldman Sachs has never condoned and would never condone inappropriate activity by any of our people. … [I]n the next few weeks, Goldman Sachs will have the opportunity to appear before Congress and discuss our role and participation in the mortgage market more broadly. We look forward to discussing our strong record of prudent risk management. … We have faced challenges before and our people have always responded through their skills, talent and focus on our clients. We will do that now, and in the process, reaffirm everything that defines Goldman Sachs. Thank you.”

Blankein and other executives will appear April 27 before Sen. Carl Levin (D-Mich.), chairman of the Permanent Subcommittee on Investigations (Homeland Security and Governmental Affairs Committee), for a hearing on “The Role of Investment Banks” as part of a series on “Wall Street and the Financial Crisis.”

GOLDMAN DRIVES THE WEEK– The SEC’s bombshell civil fraud allegations that Goldman Sachs created a purposefully toxic mortgage security with the help of a big hedge fund client (John Paulson), who netted a billion dollar profit betting against the security (Abacus 2007 AC1), created global ripples over the weekend and promises to be a central force behind this week’s debate over financial reform legislation.

Signs are emerging that a deal on that legislation could be brewing. Treasury Secretary Timothy Geithner on Sunday sounded confident that a deal would get done. He is to meet today with Sen. Susan Collins (R-Maine), the last Republican to sign Minority Leader Mitch McConnell’s letter promising to oppose the Dodd bill in its current form.

Eamon Javers heard some talk Sunday of a Dodd press conference in the works for today with Sen. Mark Warner (D-Va.), who has been at the center of negotiations on the bill, especially concerning the controversial proposal for a $50 billion bank-funded emergency liquidity pool that would be used to wind down systemically significant failing banks. Republicans say this fund means the continuation of “too big to fail.” The White House has never really supported the fund. Some Democrats say it only reflects the reality that there will always be large institutions whose quick collapse would threaten the financial system and the fund insures that it will be banks, not taxpayers, who clean up such potential messes.

OPEN QUESTIONS – Goldman’s creation of the security and Paulson’s bets against it certainly don’t look very good in hindsight. But was there really anything illegal going on? As one law professor notes in an NYT piece below, any of the highly sophisticated investors in Abacus could have examined its component parts and come up with their own estimation of the likelihood that the security would perform badly, as of course it did. So far, no one seems to be suggesting Goldman failed to disclose to anyone what was actually in Abacus. So the question is whether they should have disclosed Paulson’s role in the creation of the security. Goldman clearly believes it should not have. In fact, to do so might even be viewed as perverse and tantamount to telling a buyer of security what a seller was doing, which is certainly not common Wall Street practice. None of this reduces the giant political significance of the charges, which could well go down as the moment that pushed financial reform across the finish line in a form favored by the White House and Democrats in Congress. Have a look at Abacus 2007-AC1 for yourself.

HOT CLICK – Prior to the revelations about his dealings with Goldman Sachs, hedge fund manager John Paulson sent this letter, attached to an invitation to an April 5th fundraiser at the Friars Club in New York for Sen. Chuck Schumer (D-N.Y.). LETTER

SPOTTED – Eamon reports that a source saw Sen. and Mrs. Dodd, Sen. and Mrs. Dorgan and Sen. Feinstein just walked out of Cafe Milano.

ALSO DRIVING THE WEEK – Citigroup reports earnings today. Goldman reports Tuesday and chief financial officer David Viniar will, as usual, handle the analyst and media calls. Morgan Stanley reports Wednesday … On Tuesday, the Senate Finance Committee takes up President Obama’s proposal for a special tax on the largest banks … Also Tuesday, House Financial Services holds a hearing on policy issues raised by the Lehman Brothers bankruptcy examiner’s report … G20 meets in D.C. on Thursday. Also Thursday, Senate Banking holds a hearing on China’s exchange rate policy … On Friday, the Senate Permanent Subcommittee on Investigations holds a hearing on the credit rating agencies.

** A message from the Financial Services Forum: To expand and create jobs, the U.S. economy needs sensible and effective financial regulatory reform. We appreciate the hard work of Senators on both sides of the aisle to address these complex issues, and respectfully urge members to reach a bipartisan agreement this year. www.financialservicesforum.org **

GOLDMAN CLASHED WITH SEC FOR 20 MONTHS – FT’s Francesco Guerrera and Megan Murphy report: “Documents obtained by the Financial Times throw new light on the rocky relationship between Goldman Sachs and the [SEC] during the 20-month probe that led to last week’s fraud charges … The frayed mood between the bank and the regulators might explain the SEC’s decision to file civil charges against Goldman on Friday without warning the bank, as well as the two sides’ lack of settlement talks before last week’s move. In a 40-page document written in September last year in response to the SEC’s initial accusations, Goldman and Sullivan & Cromwell, its lawyers, say the authorities’ case is riddled with ‘fatal deficiencies’ and criticises the regulators for laying blame with the benefit of ‘perfect hindsight’. … The SEC declined to comment on Goldman’s documents on Sunday. In Goldman’s view, it ‘defies credulity’ that ACA, the independent manager of the CDO that also invested in the security, would have taken Paulson’s suggestions on the loans if it had any concerns.”

SENIOR EXECS INVOLVED IN MORTGAGE BIZ – NYT’s Louise Story reports on pg. A1 that “according to interviews with eight former Goldman employees, senior bank executives played a pivotal role in overseeing the mortgage unit just as the housing market began to go south. … According to these people, executives up to and including Lloyd C. Blankfein, the chairman and chief executive, took an active role in overseeing the mortgage unit as the tremors in the housing market began to reverberate through the nation’s economy. … Lucas van Praag, a Goldman spokesman, said that senior executives were not involved in approving the Abacus deals [at the center of the SEC charges]. He said that the executives had sought to balance Goldman’s positive bets on the mortgage market, rather than take an overall negative view.”

GOLDMAN CLIENTS STAY LOYAL – Reuters reports this morning from Hong Kong: “Clients of Goldman Sachs are standing behind the bank after the top U.S. securities regulator slapped fraud charges against the Wall Street powerhouse over its marketing of a subprime mortgage product.”

SEC PROBE COULD HIT OTHER BANKS – WSJ’s Carrick Mollenkamp, Serena Ng, Gregory Zuckerman and Scott Patterson report on page A1 that the SEC “after having hit Goldman Sachs Group Inc. with a civil fraud charge, is investigating whether other mortgage deals arranged by some of Wall Street's biggest firms may have crossed the line into misleading investors. … Among the firms that created mortgage deals that soon went sour were Deutsche Bank AG, UBS AG and Merrill Lynch & Co., now owned by Bank of America Corp. It isn't known what deals the SEC is investigating. Further cases could hinge on whether the SEC sees what it considers misrepresentation, and not just questions such as whether a deal favored one client over another.”

WAVE OF LAWSUITS – The (London) Times’ Christine Seib and Martin Waller report: “Lawyers in the United States were predicting a wave of legal action last night in the wake of the $1 billion fraud charge brought against Goldman … Richard Blumenthal, the Connecticut attorney-general, said that he had begun a review of the case. ‘A key question is whether this is an isolated incident or part of a pattern of investment banks colluding with hedge funds to purposely tank securities they created and sold to unwitting investors.’ At the weekend, lawyers were hunting for investors who lost money on Goldman’s Abacus products to join a potential action against the bank.”

BROWN'S TWO CENTS – FT’s Francesco Guerrera, Jean Eaglesham and Ralph Atkins report in the front page splash: “British premier Gordon Brown attacked the ‘moral bankruptcy’ of Goldman Sachs on Sunday … The German government said it would consider legal steps against Goldman. IKB, a German bank that was one of the first casualties of the global crisis in 2007, was one of three investors in the collateralised debt obligation at the centre of the case and lost about $150m when it collapsed as the US housing bubble burst.”

DEMS EMBOLDENED – NYT’s Jackie Calmes reports on pg. A1 that the Goldman case “has emboldened Democrats to ratchet up pressure on Republicans who oppose the Obama administration’s [financial reform] proposal. In a sign of the Democrats’ increasing confidence that they have the better of the argument in an election year defined by voter anger at big banks and bailouts, White House officials said Sunday that President Obama would take his campaign for a regulatory overhaul on the road in coming weeks. That campaign will resemble his push that helped the health care bill past its final hurdles. ... Administration officials were especially unwilling to discuss the Goldman case because … they fear that being seen as exploiting the issue could hurt, especially amid suggestions from some Republicans and television pundits that the lawsuit’s timing was suspicious, coming so close to the planned Senate debate on the financial overhaul bill.”

HOW GOLDMAN FOUND OUT – POLITICO’s Mike Allen reported in Playbook on Saturday: “Goldman found out about the coming charges later than The New York Times, which was able to instantly post a 1,200-word story on the SEC charges, while the WSJ and AP scrambled to write it live. (Some top Goldman execs found out from CNBC.) The NYT reporters (Louise Story and Gretchen Morgenson) got their heads-up after writing a Christmas Eve front-pager calling attention to the arrangement (“Bank Bundled Bad Debt, Bet Against It and Won: When Mortgage Deals Soured, Clients Lost but Not Goldman”).

GOLDMAN STUNNED BY CHARGES – WSJ’s Sue Craig, Kara Scannell and Gregory Zuckerman report on pg. 1: “Goldman Sachs Group Inc. officials said they knew as far back as August 2008 that regulators were examining controversial mortgage securities created by the firm but were stunned by the bombshell civil fraud suit lodged against it Friday, with most having learned about it from news reports. Firms typically get a chance to settle such suits, but not in this case, Goldman said. … The move showed a combative streak from the SEC, which has been under mounting pressure after letting slip through its fingers early probes into the Ponzi scheme of Bernard Madoff and the alleged fraud of Texas financier R. Allen Stanford.”

SUNDAY TALK ROUND-UP:

GEITHNER 'CONFIDENT' – Treasury Secretary Timothy Geithner on NBC’s “Meet the Press”: “I’m very confident you’ll see some Republicans vote for this. I believe that we are very close on this. That we agree on the vast bulk of the things necessary to end too big to fail [and] protect taxpayers in the future.”

BROWN OPPOSED – Sen. Scott Brown (R-Mass.) on CBS’ “Face the Nation” said he would support a filibuster of the Dodd bill in its current form: “The bill is not a good bill, period.”

MCCONNELL SAYS HE'S NOT BLOCKING – On CNN’s “State of the Union”: “I thought [President Obama] wanted us to have a bipartisan bill … That's what I would like to have. …

we certainly didn't talk about blocking the bill. I don't know anybody who's in favor of blocking this bill. ... For the president to politicize this in the same speech in which he said we ought to de-politicize it is really quite amusing, the same day the Democratic National Committee is putting up Web ads trying to attack Republicans on this issue.” [SEE BELOW FOR MORE ON THOSE WEB ADS].

CLINTON HAS REGRETS – Former President Bill Clinton on ABC’s “This Week” expressed regret over financial deregulation that occurred under his watch and said he should have pushed harder for greater oversight: “That was a mistake I made.”

MCCAIN SAYS … SOMETHING – Sen. John McCain (R-Ariz.) on “Fox News Sunday”: "When we find out that Goldman Sachs was betting against its own investors and, you know, playing the double game -- and I'm sure we're going to find out they weren't the only ones -- look, things have got to change in the way that they do business."

OTHER JUICY NUGGETS:

DNC BUYS GOOGLE ADS – POLITICO’s Mike Allen reports: “When you type ‘Goldman Sachs SEC’ into Google, the results include an ad for Wall Street reform, paid for by the Democratic National Committee. With the White House amping up its push for tighter regulations of banks, a financial-services industry lobbyist called the ad buy ‘the Chicagoland equivalent of a horse head in your bed.’ … Brad Woodhouse, the DNC communications director, told POLITICO: ‘We have all kinds of online advertising up to allow folks who are searching and reading online to get involved with Organizing for American and the president and make a difference on his agenda. We've been running online ads since early last year. We watch closely what terms folks are searching and set up our ads accordingly.’ Woodhouse said the ad is part of an online campaign that began about two weeks ago, and has included such Google search terms as ‘Goldman,’ ‘Wall Street’ and ‘Bank of America.’ SCREENGRAB

FAMILY MATTERS – Vanity Fair’s Vicky Ward writes on HuffPo that the former head of ACA (the now defunct bond insurer that helped put together the Goldman security) is married to a senior Goldman executive.”

GOLDMAN MAY NOT HAVE VIOLATED THE LAW … – NYT’s Gretchen Morgenson and Landon Thomas Jr. report: “Marcel Kahan, a law professor at New York University, said he suspected that much of the story had not yet been told concerning the strength of the S.E.C. charge. But based on what he has read, he said, the allegations against Goldman look bad but might not be illegal. For instance, he said that those who lost money in the deal were sophisticated investors who knew what was in the financial instruments and could check them out for themselves. As such, Goldman may argue that there was no material misstatement or omission in the documents and statements that it provided investors.”

… BUT IMPACT COULD STILL BE HUGE – FT’s Patrick Jenkins and Francesco Guerrera report: “The immediate financial implications of the SEC’s charge are tiny compared with the $13.4bn net profit Goldman made last year – the bank could be slapped with a fine, as well as having to return the money it made on the deal. But the broader damage the affair could wreak is vast. Goldman insiders say they were stunned by the SEC’s charges. In a company that built its ethos and pay structure on hiring the best and being the best, the surprise news that Goldman stood accused of securities fraud was a bombshell. … Goldman’s executives could barely hide their anger at the way the regulators had handled the situation. They said the probe into the CDO the bank arranged for Paulson had begun nearly two years ago and the last time Goldman had heard from regulators was in July. Goldman executives hint that the SEC’s apparent unwillingness to enter into settlement talks before making the charges public, which is customary especially in high-profile cases, and the timing of the announcement, had more to do with politics than regulation.”

ALSO DRIVING THE CONVERSATION:

DODD SEEKS HIS LEGACY – POLITICO’s David Rogers profiles Senate Banking Committee Chairman Chris Dodd, a “born counterpuncher” who has “gone for the throat of his old legislative partner on the Senate Rules Committee, Sen. Mitch McConnell (R-Ky.), whom Dodd all but accused of flat-out lying and failing to meet his responsibilities as Senate minority leader.”

PROSECUTORS EYE COUNTRYWIDE – WSJ’s John R. Emshwiller reports on pg. C1: “Federal criminal investigators looking into the collapse of Countrywide Financial Corp. have been calling witnesses before a grand jury, say people familiar with the matter. Such a step suggests that the investigation of the one-time mortgage giant, which has been continuing for about two years, could be moving closer to a resolution. ... Last June, the SEC filed a civil suit in Los Angeles federal court against three former top Countrywide executives, including the company's longtime chief executive, Angelo Mozilo. The pending SEC suit asserts that the three men defrauded investors by falsely claiming that Countrywide underwrote low-risk mortgages at a time when the company was getting into increasingly risky parts of the lending business, including so-called ‘subprime’ mortgages made to less creditworthy borrowers.”

PROMOTION AT CITIGROUP – POLITICO’s Mike Allen on a staff email from Nicholas Calio, Executive Vice President, Global Government Affairs: “Bob Schellhas will become Managing Director and Head of Federal Government Affairs reporting to me in the Washington, D.C. Global Government Affairs office. With Citi since 2003, most recently as Managing Director, Federal Government Affairs, Bob has more than 20 years of experience in Congress, political campaigns, and government affairs.”

(EDITED BY TIM ALBERTA)

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To retain its global leadership position, the United States needs a 21st century supervisory framework that ensures safety and soundness; meets the financial needs of American businesses, workers, savers, and investors; ensures that consumers' and investors' interests are protected; and is efficient, flexible, and responsive to the activities, innovations, and risks of the world’s most sophisticated and dynamic capital marketplace. Learn more at www.financialservicesforum.org and follow the Forum on Twitter: http://twitter.com/fsforum. **